Sunday, November 27, 2016

Up,Up and Away

... at least that's you are led to believe by nearly all of the market pundits. While I was one of the few calling for a post-election rally early November based on extreme bearish sentiment, intermediate indicators are now warning that an end is near.Today, I will be looking at a variety of indicators, including a last look at the the IBB (biotech) which I plan to replace with the banking sector BKX (FAS and FAZ ETFs) due to the resurgence in interest rates. The overall Indicator Scoreboard has almost completed a 180 degree turn from before the election, having surpassed the low bearish sentiment before the August 2015 and January 2016 declines, but still above an official SELL signal.

The Short Term Indicator (VXX $ volume and Smart Beta P/C) has been falling even more slowly, mostly due to the Smart Beta P/C (ETF Puts/Equity Calls), leaving me to expect more time is required before a significant decline is seen.

The SPX 2x ETF ratio, SPXU/UPRO, is probably the closest indicator to giving a SELL since the short term EMA has reached the lowest level in two years, while the longer term EMAs may have further to decline.

The 3x NDX ETF ratio SQQQ/TQQQ is also approaching the lowest level of bearish sentiment for the last two years, leaving the potential for a H&S as a strong possibility for this sector.

The outsize reaction of the small cap index RUT to the rest of the market is understandable when you consider that the proposed 20-25% corporate tax rate would allow small businesses to pay the same tax rate the large corporations have been paying for 20 years or more thru the use of foreign subsidiaries. Surprisingly, bearish sentiment (TZA/TNA) is still moderate, supporting further gains for this sector short term.

The gold bugs HUI index is in a precarious position as sentiment (DUST/NUGT) is less bearish than May of 2015 when from the same level as today at 180, a waterfall decline began taking the index down to 100 over a three month period. A repeat performance may be in order the first quarter 2017 if talks begin of additional FED rate hikes.

Bonds, unlike gold stocks, have seen a sharp rise in bearish sentiment. However, the current bearish level is equal to the April 2015 period after rates rose to 2.1% before rising to 2.5%. This leads me to believe rates may rise to 2.8% short term. But longer term, my belief that long periods of over bought (below mean) are matched by long periods of over sold (above mean) means the next 12 months will be rough for bonds (see gold stocks sentiment cycle).

Finally, without explanation the IBB, although this may just be an example of the long term sentiment cycle.

Conclusion. Not much change from my Nov 6 post on the expectation of a fast and furious post-election rally lasting two to four weeks followed by a sharp decline of 15-20% in the SPX over the next 9-12 months starting by EOY.Weekly Trade Alert. None. Updates @mrktsignals if necessary.